Greetings, and welcome to the AirSculpt Technologies, Inc. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Dennis Dean of AirSculpt. Thank you. You may begin..

Good morning, everyone, and thanks for joining us to discuss AirSculpt Technologies results for the third quarter. Joining me on the call today is the company's Founder and Executive Chairman, Dr. Aaron Rollins; and Chief Executive Officer, Todd Magazine.

Before we begin, I would like to remind you that this conference call may include forward-looking statements. These statements may include our future expectations regarding financial results and guidance, market opportunities and our growth.

Risks and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we will file with the SEC, all of which can be found on our website at investor.elitebodysculpture.com.

We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. During our call today, we will also reference certain non-GAAP financial measures.

We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.

A reconciliation of these measures can be found in our earnings release as filed last night and in our most recent 10-Q when filed, which will also be available on our website. With that, I'll turn the call over to Aaron..

Thank you, Dennis. Good morning to everyone, and thanks for joining the call. I'm very pleased with our strong third quarter results and our team's ability to execute with excellence on a global basis.

We are also making great strides in growing brand awareness for AirSculpt and believe the investments we are making now are important to our future success. We look forward to a strong finish to 2023 and continuing to drive long-term shareholder value.

On the innovation front, as I mentioned during the last quarter call, we are early in the rollout of AirSculpt Lift, a facial fat transfer procedure that can eliminate wrinkles, restore lost volume to areas of the face and provide more volume in lips.

As you know, the broader filler market is over $4 billion, which expands our already significant TAM to over $11 billion.

We have started the rollout of AirSculpt Lift in about a third of our centers, including London, and we'll continue to expand into the rest of the centers over the coming months, as we train up our doctors and educate our sales and marketing teams. While we are early in the process, we expect a meaningful impact in 2024.

Overall, our team is delivering consistent performance in executing on our key growth areas. Our strategy continues to focus on strengthening the AirSculpt brand, accelerating our store openings and further enhancing our profitability as we scale our business both domestically and internationally. With that, let me now turn things over to Todd..

One, driving revenue growth, which includes ramping up our de novo expansion program; two, strengthening the organization, improving our processes to support a much larger and more robust fleet of centers; and finally, rightsizing our cost structure to further increase our profitability.

From a revenue growth standpoint, our de novo program continues to demonstrate strong and predictable performance. With the opening of our San Jose, California and Raleigh, North Carolina locations during the quarter, we have now delivered on our goal of opening five new centers in 2023, including our first overseas location in London.

This is the most de novos we have opened in a single year. But more importantly, all five centers are performing at or above our original expectations.

I'm particularly excited about our London location where we have seen strong momentum, giving us continued optimism that this will be a flagship location as well as a gateway to other international markets. I'm also happy to share that our 2024 de novo pipeline is robust.

As announced during our last call, we will open at least six new centers next year, which includes locations in Detroit, Michigan and Kansas City, Kansas, our first locations in these states. We're also announcing a new location in the Chicago land area.

This will be our second location in this market, which will provide additional critical mass that will enable increased brand awareness and operational efficiencies. We look forward to sharing more about our de novo growth strategy on our year-end call.

Finally, as it relates to revenue growth, as I noted above, we are excited to see our business return to positive same-store growth this quarter now that the prior year comparison is no longer reflecting the anomalous consumer behavior related to COVID.

Our comp center growth for the quarter as well as our average surgery price of $13,600, which was above the high end of our range, further reinforces our continued optimism, but our unique proposition remains in high demand with no evidence that the broader economic concerns or the popularity of the new weight loss drugs are having any adverse impact on our business.

I'd like to turn now to my focus area related to strengthening the organization and improving our processes. As we reported last quarter, we have fully completed the additions to our executive team. We are confident that these additions will make the business much stronger and will allow us to grow faster and more efficiently in the years ahead.

We're also rolling out Salesforce, which will take our sales and marketing processes to a completely new level. Historically, our processes have been very manual and tracking relevant KPIs has been very difficult and inefficient.

Salesforce will provide us with more real-time data and will allow us to better analyze our sales and marketing performance, both of which will further help drive growth. We anticipate this implementation to be completed by the end of the first quarter of 2024. Let me turn now to our cost management efforts.

Our stated plans remain on track, which will enable us to fully achieve our plan of $2.5 million of cost savings in 2023 with a run rate of $5 million as we exit the year. Clearly, our cost savings efforts are helping put us on a path back to achieving our historical EBITDA margin levels of 30% plus.

However, these cost savings efforts, combined with our strong business performance, have also given us the opportunity to invest in brand awareness efforts, which have a long tail impact on business performance. Our first significant brand awareness initiative was earlier this year with actress and TV personality, Jennie McCarthy.

Given the strong consumer response to this effort, we invested in a second celebrity initiative with singer, dancer, actor and TV personality, Joey Fatone, a member of the popular band NSYNC. To the surprise and delight of fans, the band recently reunited at the 2023 MTV VMA's to present Taylor Swift, the award for Best Pop video.

Shortly after this appearance, they released their first single in 20 years for the upcoming Trolls movie and sparked rumors of a potential reunion tour. Our Joey Fatone AirSculpt initiative is just hitting the market and will build further momentum through Q4.

Joey had AirSculpt on his full abdomen to remove stubborn fat hiding his abs, waste and obliques and to help him develop a more chiseled jawline.

While Joey has wide appeal, we also believe there is a significant opportunity to drive our penetration with men who are becoming much more comfortable with aesthetic procedures and only make up 10% of our business.

In summary, I am very happy with the company's performance, our focus on improvements and our long-term growth prospects, all of which will provide meaningful value to all of our key stakeholders. With that, I would like to turn the call over to Dennis to provide further details on the quarter..

Thanks, Todd. Our revenue for the quarter was $46.8 million, a 20.3% increase over the prior year quarter. Our growth was led by approximately 19% increase in our case volumes, which was primarily due to the addition of seven de novo centers versus the prior year base.

As of September 30, 2023, we operated 27 centers versus 20 at the end of the third quarter of 2022. Our same-store revenue grew by 5.3% from the prior year period, which was in line with our expectations and mostly driven by volume increases.

We continue to be encouraged by the demand we are seeing, and we expect to achieve mid-single digit comp growth in the fourth quarter. While we're pleased with our recent same-store revenue growth, we continue to believe that the opening of new centers remains the primary growth vehicle for AirSculpt.

Average revenue per case for the quarter was $13,658, a 1.1% increase over the prior year's quarter and a $300 increase over the second quarter of 2023, driven primarily by our procedure mix. While we continue to target a $12,000 to $13,000 average sale price, we do expect quarterly fluctuations in this average.

Our percentage of patients using financing to pay for procedures was approximately 50% during the quarter. This was a slight increase over recent quarters as we added new financing vendors to our mix of offerings to patients.

These new vendors have higher financing approval rates and allow patients to potentially finance higher dollar amounts than our existing financial resources. Just as a reminder, we received full payment on all of our procedures upfront, and we do not have any recourse related to patients who finance their procedures.

Our cost of service as a percentage of revenue was 38.8% versus 38.3% in the same period last year. And our customer acquisition cost for the quarter was approximately $2,750 per case as compared to $2,650 in the prior year.

As Todd mentioned, given our strong top line performance this year, we chose to further invest in our brand awareness activities, which is reflected in our increased customer acquisition costs during the quarter.

We continue to expect our customer acquisition cost to decrease over time as we begin to benefit from these and other brand awareness initiatives. For the quarter, our adjusted EBITDA was $9.1 million compared to $8.1 million from the prior year period, an increase of 12.2%.

Our adjusted EBITDA results now include the impact of preopening costs for de novo centers in our calculation. This impact was approximately $0.5 million in the current quarter and $1.1 million in the prior year quarter.

As a reminder, this change in presentation does not impact our reported cash flow or leverage ratios as calculated under our credit facility. Our adjusted EBITDA margin was 19.4% compared to 20.8% in the prior year quarter, a decline of 140 basis points.

Our margins were impacted by 200 basis points related to our brand initiative investments during the quarter. Additionally, we saw a 90 basis point impact related to investments in our executive team. From a liquidity standpoint, our cash position as of September 30, 2023, was $8.7 million, and our $5 million revolver remains undrawn.

During the quarter, we voluntarily prepaid $10 million on our outstanding term loan debt. This decision was made as a result of our strong free cash flow generation, which allowed us the flexibility to opportunistically strengthen our balance sheet and reduce our interest expense going forward.

Our gross debt outstanding was $73.4 million, and our leverage ratio at the end of the quarter as calculated under our credit agreement was 1.6 times. Cash flow from operations for the quarter was $600,000, which included a quarterly tax payment of $3.5 million.

Additionally, cash paid for interest increased approximately $135,000 over the prior year quarter due to the increase in interest rates. And we expect to achieve cash interest savings of approximately $750,000 annually going forward, reflecting the recent debt prepayment.

Also during the quarter, we invested $2.1 million primarily related to opening new centers. We remain on track to post healthy free cash flow generation in 2023 and expect our cash flow from operations to adjusted EBITDA conversion ratio to be in the range of 65% for the full year.

Additionally, we provide a non-GAAP measure reflecting adjusted net income per share diluted for the quarter of $0.05. We believe this measure presents useful information to investors by highlighting the impact to earnings per share of selected items used in calculating our adjusted EBITDA.

In early October, we announced an update to our 2023 revenue whereby we increased our 2023 revenue forecast to approximately $196 million versus the prior revenue guidance range of $187 million to $192 million. This morning, we are reconfirming our 2023 revenue forecast of approximately $196 million, which would represent a 16% increase over 2022.

We are also reconfirming our revised 2023 adjusted EBITDA guidance of at least $45 million, which was an increase over our prior forecast of $43 million to $45 million. Our guidance implies an adjusted EBITDA margin of approximately 23%. With that, I'd like to turn the call over to the operator for some questions.

Operator?.

Thank you. The floor is now open for questions. [Operator Instructions] The first question is coming from Josh Raskin of Nephron Research. Please go ahead..

Hi. Thanks. Good morning.

First question is as pricing continues to come in a little bit better than expected, could you just refresh us on the percentage of consumers that are adding additional services when they come in? And then is that pricing strength consistent across all the centers or a few outliers really driving that trend?.

Hey, Josh. It's Dennis. As far as add-ons, our fat transfer additions, which is our main add-on, it remained pretty consistent, about 20%, low 20% from that standpoint. So from that standpoint, it really hasn't -- it does -- has it related to like add-ons. It's just really overall procedure mix has been pretty solid..

Hey, Josh. It's Todd. Also I'd add, it also tells us that they're really using any kind of headwind or concern from an economic standpoint. I mean, people are coming and they're doing multiple areas. They're willing to pay our price point. So it's not like we're trying to drive up the price.

But ultimately, that's what the demand is, and it tells us that there's healthy demand at our price point. But typically, look, we're going to see fluctuations. We typically, as we said, target between $12,000 and $13,000. We've seen a little bit higher than that this past quarter, which obviously, we're happy to see, but that's purely demand.

But it fluctuates and will fluctuate based on demand. But obviously, we're happy to see it and it's a good signal to us that there's not real any concern economically broader economically affecting our business..

All right. That's helpful. And then just second question for me. I know Todd, you talked about centers opening in smaller geographies as opportunities you should kind of roll out. I'm thinking about 2024 as an opportunity, and I heard the comments about the new centers in Detroit and Kansas City. I know, obviously, Chicago, a big market.

So those didn't strike me as sort of smaller opportunities.

So I'm just curious if you think that's a shorter-term phenomenon? Or do you think that's still more into the future?.

Yeah. What I would say is the nomenclature, I think, is probably not best to say smaller. I think what I would say is there's plenty of opportunity for us to do centers that are comparable in AUV to what we've done historically. There's a lot of runway left for that.

All that being said, we know that there are markets where there is probably opportunity to do a lower AUV that's still very healthy in return. And we're exploring those. That isn't necessarily our focus for next year because, again, we have lots of runway of our higher AUV de novos.

But it's something that we're looking at and we're going to probably experiment with over the coming year or two. The other thing I would say is just double-click on my comment that I made before, which is the opportunity also to open multiple locations in a given geography is going to be really significant for us.

To have one location in a market like Chicago, where we have today, it's a very big market. Now as I noted, we're going to be opening up a second location there. So it's not only an opportunity to drive growth, but it is an opportunity for us to drive brand awareness, to drive efficiencies of operation. So that's really the way we're thinking about it.

But that "smaller" de novo opportunity is something that we're still kind of looking at, but it isn't necessarily on our short-term radar..

All right. Thanks again..

Thank you. [Operator Instructions] The next question is coming from Korinne Wolfmeyer of Piper Sandler. Please go ahead..

Hey. Good morning, team. Thanks for taking the question. First, I'd like to touch on the commentary in the prepared remarks about AirSculpt Lift. It sounds like you do expect that to be pretty meaningful in 2024.

Can you just explain what you're expecting in terms of how many patients will add that on to their procedures? And what kind of pricing upcharge is that compared to like a standard treatment? Thank you..

Thanks. It's Aaron Rollins. First of all, I see almost every patient that gets AirSculpt as an AirSculpt Lift candidate because most of our patients get other cosmetic procedures. Very few of our patients are complete cosmetic procedure or aesthetic virgins.

And to throw away their fat and get artificial fillers, when we know they're probably not the best thing for you, seems ridiculous to me. So -- I mean, I think the opportunity is great. It's something that we have to roll out. It's something we have to market. Right now, we're doing a good job of training our doctors.

We're now training our sales, and we're training our doctors to explain it to patients as well at a consult. From a pricing standpoint, we made it priced very attractively. It's about the same price as a regular filler. So it's $1,500 per area. So on a volume basis, I'm sure you know fillers, you only get one CC kind of per monetary increment.

So we don't -- we can give someone as much -- as many CCs as they need for a particular area. So it's a great value. And as I'm sure you know, it lasts longer, and we think it's a far healthier option. So that's the most I can tell you right now. We don't have financial projections for it yet. It's a little early for that.

But we're very excited about the opportunity, and I'm sure many of you have seen the articles, at least in the British papers, about fillers and lymphatic drainage. So it's something we're watching keenly..

Very helpful. Thank you. And then if I could just touch on the SG&A and kind of the marketing spend that you're doing. I mean, the CAC continues to come up, even though you say it's eventually going to come down. And SG&A came a little bit higher, I believe, this quarter than we were expecting.

So can you just talk about when we're going to start seeing some better leverage in OpEx and when we'll start seeing that CAC start to come down? Is that really going to be like a '24 event, maybe push to '25? Just really how early are we going to start seeing some more leverage there? Thank you..

Hey, Korinne. It's Dennis. Yeah. Thanks for the question. One of the things that we did call out is we did some really kind of our first time into what we would call a little bit more major brand awareness activities with our Ginnie McCarthy, and as Todd also pointed out, Joey Fatone. And so those impacted our numbers in the quarter.

They were a little bit more of a, what I would call, onetime type events. It doesn't mean that we're not necessarily going to do them in the future and do more of those potentially. But from the standpoint of historically comparison, that was kind of a onetime event. It cost us about 200 bps from that standpoint as far as margins are concerned.

So that's one aspect of it. We do believe that brand awareness is our #1 opportunity for driving significant, particularly same-store growth. Obviously, de novo growth has been our major growth factor, but brand awareness is going to be significant for us, and we've been heavily, heavily focused on that.

So that's one aspect of it, which caused the CAC to go up a little bit during the quarter. That's going to fluctuate. It's going to fluctuate with seasonality. It's going to fluctuate with volume. And it's going to fluctuate with, quite frankly, opportunities we see as great investments to further the brand.

And as far as G&A, Todd talked about last quarter and again in his remarks today, we've done a lot of work in sort of building out the executive team. And so that cost us about 90 basis points, comparatively speaking, there from the standpoint. And so those are primarily complete now.

And so as we continue to grow revenue, those costs are now going to be part of a fixed number, and so we'll begin to grow margins off of that as well..

Very helpful. Thank you..

Thank you. At this time, I'd like to turn the floor back over to Mr. Magazine for closing comments..

Great. Well, we appreciate everybody joining us this morning. We hope you have a great weekend and we look forward to speaking again very soon. Take care..

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines. I'll walk off at this time and enjoy the rest of your day..